The Returns On Capital At TBK & Sons Holdings (HKG:1960) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating TBK & Sons Holdings (HKG:1960), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on TBK & Sons Holdings is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0068 = RM991k ÷ (RM171m - RM26m) (Based on the trailing twelve months to December 2020).

So, TBK & Sons Holdings has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 9.1%.

See our latest analysis for TBK & Sons Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for TBK & Sons Holdings' ROCE against it's prior returns. If you'd like to look at how TBK & Sons Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From TBK & Sons Holdings' ROCE Trend?

On the surface, the trend of ROCE at TBK & Sons Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 49% over the last four years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, TBK & Sons Holdings has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On TBK & Sons Holdings' ROCE

In summary, we're somewhat concerned by TBK & Sons Holdings' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 47% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for TBK & Sons Holdings (1 is concerning) you should be aware of.

While TBK & Sons Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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